Letters of credit
have played an important role in facilitating secure transactions between importers and exporters across borders in international trade
. It is a document issued by a bank or a financial institution that guarantees that the exporter will receive payment from the importer on time for the full or remaining amount.
What is an unconfirmed letter of credit?
An unconfirmed letter of credit means that the issuing bank has shared commitment to pay a specified amount to the beneficiary (exporter) upon the fulfillment of certain conditions. In an unconfirmed LC, the issuing bank’s obligation to pay is solely based on the creditworthiness of the importer and the issuing bank itself. The beneficiary relies on the issuing bank’s reputation and ability to honor the terms of the letter of credit1.
Advantages of unconfirmed letters of credit
Flexibility and speed
Importers and exporters have the freedom to agree upon specific terms and conditions without the need for approval from a confirming bank. This streamlined process leads to faster issuance and delivery of the letter of credit
With an unconfirmed letter of credit, the beneficiary (seller or exporter) can directly communicate with the issuing bank. This allows for a clear and efficient exchange of information, enabling quicker resolution of any discrepancies or inquiries.
Enhanced importer and exporter relationship
By opting for an unconfirmed LC, importers demonstrate trust in their own creditworthiness and financial stability. This gesture can foster a stronger importer relationship, as it signifies confidence in the seller’s ability to fulfill their obligations.
Since there is no involvement of a confirming bank, the associated costs such as confirmation fees or additional commissions are eliminated. This makes unconfirmed letters of credit a cost-effective option.
Disadvantages of a confirmed letter of credit
Lack of additional security
Unlike confirmed LC
s, unconfirmed letters of credit lack the additional guarantee provided by a confirming bank. This absence of a second bank’s assurance leaves the beneficiary with limited recourse in case of default by the issuing bank.
High risk for exporters
In an unconfirmed letter of credit, the exporter relies solely on the creditworthiness and reputation of the issuing bank. If the importer’s country faces economic or political instability, there is a risk of non-payment or delays in payment.
Limited negotiation power
With an unconfirmed LC, the terms and conditions are usually determined solely by the issuing bank and the importer. The seller has limited negotiation power.
Limited access to financing
For sellers who rely on financing options, such as using the letter of credit as collateral for loans, unconfirmed letters of credit may pose challenges. Lenders may be more hesitant to accept an unconfirmed LC as collateral due to high level of risk associated with it.
How do unconfirmed letters of credit work?
Agreement and issuance
The importer and exporter agree to use an unconfirmed letter of credit as the payment method for their trade transaction2.
Application to the issuing bank
The importer applies for the unconfirmed letter of credit from their bank, known as the issuing bank.
Issuing bank’s commitment
Upon verifying the importer’s creditworthiness and the validity of the transaction, the issuing bank issues the unconfirmed LC.
Shipment and presentation of documents
The exporter ships the goods to the importer and prepares the required documents, such as bills of lading
, certificates of origin
, and commercial invoices
. The seller presents these documents to the issuing bank to claim payment.
Document examination and payment
The issuing bank examines the presented documents to ensure they comply with the terms and conditions outlined in the unconfirmed letter of credit. Once done, it proceeds with payment to the exporter.
Difference between unconfirmed letter of credit and confirmed letter of credit
Unconfirmed letter of credit
• No additional guarantee from a confirming bank
• Lower cost
• Higher risk for the seller
• More flexibility in negotiation and customization of terms.
• Security relies solely on the issuing bank’s creditworthiness.
• Limited recourse in case of default by the issuing bank.
• Generally simpler and streamlined documentation process.
Confirmed letter of credit
• Additional guarantee from a confirming bank.
• Higher cost due to the involvement of a confirming bank
• Partial risk assumed by the confirming bank
• Negotiations may involve the confirming bank’s consent.
• Enhanced security with the involvement of a confirming bank.
• Partial recourse through the confirming bank in case of default.
• May involve more complex processes and documentation.
Unconfirmed letters of credit provide a streamlined process and foster strong importer-exporter relationships. Understanding the use of unconfirmed letters of credit can help exporters engaged in international trade make informed decisions. By weighing the advantages, disadvantages, and differences between various types of letters of credit, you can choose the most suitable payment method to facilitate successful trade transactions while mitigating risks. However, if you export via e-commerce, you can directly sell your products to customers shopping on global marketplaces and receive payments directly to your account.
Amazon Global Selling: Your passport to easy exports and shipping from India
Amazon Global Selling
enables Indian exporters to register and sell their ‘Made in India’ products on 18+ international marketplaces across the world including Amazon USA
, Singapore, UAE
, and more. It also provides support from experts at every stage of the export process including logistics
through Fulfillment by Amazon (FBA)
. With free webinars and city-wise events for exporters, documentation support and more, Amazon simplifies exporting from India.
Published on September 29, 2023.